It was not the most promising of omens when shortly after the Government published its insolvency white paper, the manufacturing sector officially entered a recession. That is, of course, unless you are an insolvency lawyer, and then new legislation followed by the possibility of an economic downturn is, indeed, a double blessing.
As far as industry is concerned, the main thrust of the proposals is to take the heat off crisis-hit businesses by streamlining administration and pretty much scrapping administrative receivership away from the creditor to debtor. The paper argues that the enthusiasm of banks to bring in the receivers in the last recession of the early 1990s led to companies unnecessarily going to the wall.
The insolvency paper and a paper on competition policy are expected to form an Enterprise Bill to be published later in the year. One Government official says that the insolvency paper is “a campaign against banks”. Not surprisingly, the paper's rhetoric has been far more guarded, claiming that its aim is to create “an enterprise economy to make the UK the best place in the world to do business”.
The paper also plans to give hope to failed or failing entrepreneurs by, for example, reducing the discharge period for “honest” bankruptcies from the current three years to 12 months.
R3, the main insolvency industry body, fears the worst from the proposed reforms. It claims that the abolition of the receiver could “starve UK businesses of the funds that they need to grow”. The paper vaguely proposes to restrict administrative receivership to “certain transactions in the capital markets”.
According to the paper, the package of reforms is designed to promote administration and “create a fairer system in which there is a duty of care to all creditors and all creditors are able to participate”.
KPMG partner Roger Oldfield, who is also the president of R3, warns: “If they go further and tinker with banks' security rights, the results could be disastrous. The cost of credit could rise and anything other than risk lending would become more difficult to obtain.”
“There is a degree of wanting to manipulate figures rather than achieve real results”
Dan Hamilton, CMS Cameron McKenna
However, insolvency law practitioners are more sanguine about the plans. Peter Manning, a partner in Simmons & Simmons' corporate recovery department, predicts that any change will be largely cosmetic. “All they are doing is tinkering around the edges,” he says. “They're swapping a procedure driven by one creditor for what they perceive as a procedure driven by a wider range of creditors.”
Administrative receivers are normally appointed by the bank or other lending institution, which has the major part of a company's assets as security for a loan under a floating charge. The receiver can operate the business while trying to sell it off as a going concern.
Under administration procedure, a licensed insolvency practitioner is appointed as administrator under a court order following a petition by the company, its director, or its creditors. It is designed to keep the company together while plans are made to either save the organisation or maximise its value.
Consequently, an attack upon the receiver has been interpreted as an attack upon the lending institutions. But Dan Hamilton, a partner in CMS Cameron McKenna's banking and international finance department, doubts whether the banks will suddenly become less willing to lend simply because they will lose the tool of the receiver. He says that they are no less willing to lend in the US or on the Continent, where there is no such procedure. He says: “Banks are in the business of lending money and 98 per cent of them don't fail. So I don't think they're going to mess up the vast majority of their business for the sake of a few per cent.”
But Hamilton believes that the lending institutions might be “mildly upset” as the proposals are based “not so much on fact, as on prejudice”. His firm acts for three of the four UK clearing banks and he believes that if a rescue were at all possible they would not send in a receiver.
He says that the Government is keen on saving corporate vehicles rather than rescuing businesses. “There is a degree of wanting to manipulate figures rather than achieve real results,” he says. “The economic effect of saving a company may be no better than saving a business, but it reduces the statistics of insolvencies,” he says.
Far from the paper representing a campaign against the banks, Denton Wilde Sapte banking and finance partner Michael Rutstein believes that the secured creditors will not really suffer. “If anything, they gain slightly,” he says, arguing that the reforms could have the ironic effect of allowing creditors to take the benefit of the moratorium provided by an administration order. Such a breathing space is not available to receivers.
Rutstein says: “Secured creditors are going to find that although they can't appoint their own man to run the show, they can appoint an administrator to realise the secured creditor's security and, lo and behold, they will have the benefit of the moratorium, which will assist the administrator in the realising of their assets.”
Garretts head of litigation Ashley Brooker, who was formerly head of insolvency at Clifford Chance, says: “To some extent, this paper is recognising what has already begun to happen. I think the banks have realised that the days when they could go in swashbuckling have gone.”
At an R3 symposium in January, three major banks expressed a willingness to abolish their right to veto the appointment of an administrator – most receivers are appointed with the support of the company's directors.
Manning believes that banks have been devoting considerable energy to rescuing businesses for at least six or seven years. “They have recognised for some time that their interests are not best served by putting companies into receivership,” he says.
Brooker points out that the white paper goes a long way in its attempts to reassure secured creditors that their rights are not being eroded. In particular, such a creditor would not have to submit a report under Rule 2.2 of the Insolvency Rules 1986, and in “cases of urgency” no notice would have to be given to the company. “That is pretty close in terms of being able to move quickly to receivership,” he says.
For Ian Field, a banking partner at Allen & Overy who specialises in insolvency and restructuring, his chief concern is the extent to which the receiver would survive the reforms. Streamlining administration might be okay for “a bilateral arrangement with a manufacturing business in the Midlands” but not, he argues, for the larger deals where there are different levels of bank debt and structured finance.
The nagging problem is how broad the exception, allowing deals to be dealt with by a receiver, will be. Field says: “It might end up introducing a level of uncertainty into the regime, which is clearly the last thing in the world that anyone needs.”
A more unconditional and enthusiastic welcome is extended to the scrapping of Crown preference – the right of Government agencies to be paid before other creditors. And Brooker says this is “not before time”.
It has been reported that the move could cost the Treasury somewhere between £60m-£90m a year. A number of lawyers have expressed considerable surprise that the benefit is to go to unsecured creditors, and not to be used as a “sweetener” for the banks. “In a way the Government is being more radical than it really needs to be,” Rutstein says.
Much has been made of ministers' admiration for the US insolvency regime and, in particular, the Chapter 11 'debtor in possession' procedure, where management remains in charge while a rescue strategy is put in place. The package of reforms in the paper has been seen as a shift towards the US model.
Meanwhile, there is draft legislation in the US which envisages tipping the balance in favour of the creditor. The UK system has “a hell of a lot going for it”, says Field. “It has flexibility, certainty, and the ability to get banks to lend at a more aggressive rate [ because the security is there].”
Field says: “If you don't believe that the banks really like killing customers and you take with a pinch of salt the argument put forward in the last recession, that banks withdrew funding too quickly, then you have to say administrative receivership has been successful in saving businesses.”
|Insolvency white paper reforms at a glance|